Boeing Deals with its Supply Chain and Production Realities

Last week Boeing announced a tentative agreement with the International Association of Machinists & Aerospace Workers (IAM) on a four year labor contract extension with its union labor force. Reports indicate that the deal involves concessions from both sides. According to an article appearing on the Wall Street Journal, (paid subscription required or free metered view) secret talks began in late October to lay the groundwork for replacing a contract scheduled to expire in September 2012.

A posting on the IAM web site indicates that if ratified, the terms call for annual wage increases of 2 percent, plus cost-of-living adjustments; an incentive program intended to pay bonuses between 2 and 4 percent; a ratification bonus of $5,000 for each member and increases to the formula for calculating pensions in each year of the pact. Boeing has further agreed to source the production of its new 737 MAX aircraft, the newest planned version of the 737, scheduled for initial first customer ship in 2017, within the union facilities in Renton Washington. The agreement further calls for the establishment of high-level monthly committees that will provide the IAM and Boeing the opportunity to review and discuss issues including market conditions, quality, safety, productivity, schedule and cost. The IAM also tentatively agreed to drop its opposition to Boeing’s use of the Charleston North Carolina facility as the second final assembly plant for the assembly of some 787 Dreamliners.

Boeing was already embroiled in an unfavorable ruling by the U.S. National Labor Relations Board (NLRB) on opening the second facility in South Carolina. The NLRB had accused Boeing of moving production to South Carolina in retaliation for previous labor strikes and union opposition and was blocking the ramp-up of that facility. Facing the threat of a prolonged appeals process laded with political overtones, it would appear that Boeing chose a prudent path to deal with its union directly to resolve the dispute.

With a current $332 billion order book and a 787 program that is seriously overdue in customer delivery, Boeing needs to quickly bring the new Charleston facility up to speed as well insure stability in labor agreements for the next four years as other programs ramp-up volume production. Boeing’s supply chain partners also gain the benefit of a customer that is focused on meeting consistent operational execution rather than more unknowns. Boeing’s current plans call for ramping 787 production volumes from a current 2.5 787 aircraft, to a target of 10 aircraft per month by the end of 2013.

An article in today’s Wall Street Journal quotes Boeing’s head of commercial sales for China and Korea has indicating that if the company could free-up more production volume capacity, it would sell more planes in a “blink of an eye”.

The big question mark is whether IAM members will ratify this new agreement. Reports indicate that union members were naturally taken by surprise by the announcement, and have been given only a week to understand the terms and vote on ratification. The actual union detailed summary of the contract, calling for member ratification, can be viewed at this IAM web link. IAM members have previously rejected some agreements reached by union leadership.

For everyone’s sake, we trust that this watershed agreement will be ratified and that all parties move forward with the challenges and work ahead. The U.S. economy and Boeing’s extensive supply chain network need this company to continue to be an engine for economic growth and jobs.

A further follow-up to our commentary relative to Boeing dealing with production backlog realities and solidifying its long-term labor agreements.

The Wall Street Journal reported today that Southwest Airlines is nearing a preliminary deal to order more than 100 Boeing of the new 737 Max aircraft. The paper reports that the deal, if consummated, would not be a firm order, but rather an action by Southwest to hold production slots for the new model 737.

Availability of capacity and timely delivery dates are indeed becoming a concern for existing and future aerospace customers.

Boeing’s Machinist union agreed to ratify the four year extension of the labor agreement and the NLRB withdrew its objection to Boeing’s opening of a second final assembly production facility in Charlstown SC.

Regarding Southwest Airlines, Boeing’s largest existing customer for the 737 aircraft series, it indeed announced its order for new aircraft. Southwest placed a firm order for 150 of the new 737 Max as well as 58 next-generation 737’s. With the newest Southwest order, Boeing now has customer commitments amounting to 900 737 aircraft from 13 customers.

Boeing does indeed need to move on to the next phase of production and supply chain execution.